Dividend Reinvestment Option

Dividend Reinvestment Option

Dividend Reinvestment Option (DRIP) is a feature offered by mutual funds that enables investors to reinvest their dividends or capital gains back into the fund to purchase more shares. When an investor opts for DRIP, the mutual fund automatically reinvests the dividends earned on the investor’s existing units into additional units of the same mutual fund scheme. DRIPs are available for both open-ended and close-ended mutual fund schemes.

DRIPs are a great way for investors to compound their wealth over the long term. By reinvesting the dividends, investors can take advantage of the power of compounding and earn higher returns. Additionally, DRIPs can help investors avoid transaction costs, as they do not need to sell their existing units to purchase additional units of the same fund.

DRIPs are particularly beneficial for investors who are looking to achieve long-term financial goals. By reinvesting their dividends and capital gains, investors can boost the growth potential of their investments and accumulate more units over time. Furthermore, DRIPs can help investors build a diversified portfolio by investing in different mutual funds through the same DRIP facility. Overall, DRIPs offer a convenient and hassle-free way for investors to reinvest their earnings and achieve their investment objectives.

In case of Dividend Reinvestment option, the investor chooses to reinvest the dividend in the scheme. So the Rs. 12, which he receives as dividend gets invested into the scheme again @ Rs. 100. This is because after payment of dividend, the NAV would fall to Rs. 100.

Thus the investor gets Rs. 12,000/ Rs. 100 = 120 additional units. Notice here that although the investor has got 120 units more, the NAV has come down to Rs. 100.65

Hence the return in case of all the three options would be same. For Growth Option, the investor will have 100 units @ 112, which equals to Rs. 1,12,000 while for Dividend Reinvested Option the investor will have 1120 units @ Rs. 100 which again amounts to Rs. 1,12,000. Thus it can be seen that there is no difference in either Growth or Dividend Reinvestment Plan.

It must be noted that for equity schemes there is no Dividend Distribution Tax, however for debt schemes, investor will not get Rs. 12 as dividend, but slightly less due to Dividend Distribution Tax. In case of Dividend Reinvestment Option, he will get slightly lesser number of units and not exactly 120 due to Dividend Distribution Tax.

In case of Dividend Payout option the investor will lose out on the power of compounding from the second year onwards.

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